Citizens' replacement cost estimates rise for homeowners

Joe Freitas thought $109,000 was a good deal on his new home. His insurance agent recommended a $139,000 policy - enough to give him a cushion in case of a disaster.

But Florida's insurer of last resort says that's not enough, and will only insure Freitas if he's willing to pay for a $237,000 policy.

"I really do feel strong-armed," Freitas said. "I feel abused and beat down. When this first happened, I thought maybe it was a mistake and tried to find out what my path would be to dispute this and found out there really is no path."

That's because the huge increase in the replacement cost estimate is no mistake. Anyone applying for insurance with Citizens is coming across similar numbers. And for some of the thousands who have no choice but take what Citizens offers, the increases are difficult to afford.

It's true that in this sluggish housing market, it costs more to build a home than to buy an existing one. But Freitas questions whether it would really cost nearly $100,000 more to rebuild his home. And if Citizens is successful in collecting money on larger insurance policies, industry watchdogs say it's only a matter of time before other insurance companies start using similar models.

Consumer advocates say the replacement value increase is a back-door way for Citizens to raise rates without state approval.

Citizens' new computerized estimation tool is called the 360. Spokeswoman Christine Ashburn said many Floridians are under-insured, and this new system is supposed to make sure homeowners have enough insurance to rebuild if a hurricane wiped out their homes.

Instead of relying heavily on the word of real estate appraisers, Citizens turns to the computer. Agents input data about the home, from the year it was built to the type of counter tops it has, and the computer spits out a value. She said the system takes into account regional construction costs, which vary across the state.

Ashburn said Citizens previously used another computer system to help estimate replacement costs, but thinks the new system is more accurate. It also used to take real estate appraisals into consideration but doesn't now.

"The real estate market is not healthy," Ashburn said. "The replacement value is often higher than what you can sell it for."

For Freitas, who has an appraisal showing his home is worth about $117,000, it makes no sense why the new computer system says it would cost double to rebuild the home.

"They can't tell me why that's what the computer says," Freitas said. "They just say that's what the computer says and that's why your insured value must be."

Freitas' premium shot up from the $917 he was originally told to nearly $1,900 - and this happened 30 days after his family moved into the new home.

"It's a huge difference," Freitas said. "It's about my budget for Christmas this year."

The new computer system comes on the heels of Citizens asking the legislature for an increase in sinkhole coverage of as much as 2,000 percent in some areas. The request was not approved.

David Welch, of the non-partisan Florida Association for Insurance Reform, says his group is hearing from homeowners like Freitas, across the state.

Citizens was "turned down very hard when they asked for a 2,000 percent increase for sinkhole insurance, so now they're going to go the backwards way where there is no regulation," Welch said.

Senator Mike Fasano, R-New Port Richey, agrees. He says the replacement cost increase allows Citizens to raise rates as much as it wants.

"Homeowners could only dream of selling homes for what Citizens says they're worth," Fasano said.

Insurance companies typically use computer models in addition to appraisals, but Welch and Fasano both worry other insurers may follow Citizens' lead of relying less on estimated home values.

Freitas said he checked with nearby neighborhoods under construction and found homes similar to his for much less than what Citizens estimated it would cost to build.

For example, Freitas found a 2,112 square-foot home selling for $90 a square foot and a 2,400 square-foot home selling for $80 a square foot. Citizens' computerized estimation tool says it would cost about $148 a square foot to rebuild Freitas' 1,600 square-foot home.

But aside from the upfront cost, is it really that bad to have too much insurance? Well, consider Freitas' situation.

The nearly $100,000 in extra coverage will significantly increase his hurricane deductible, said the association for insurance reform. A 5 percent deductible, which some homeowners are required to have, would shoot up from $4,950 to $11,900. At 2 percent, which most policy holder have, would go from $1,980 to $4,760.

Ashburn, from Citizens, said there have been some cases in which the computer system was wrong. She said Citizens is making "tweaks."

Freitas' figures, she said, sounded high and she said she'd take a second look at his policy.

Meanwhile, Freitas said he worries that if he does have to rebuild, he'll never get to collect the full amount on the policy he's paying for.

"My home isn't worth $237,000," he said. "If it was, I would be living in a much nicer home."